Hu Kaihong:

Ladies and gentlemen, good morning. Welcome to our press conference. In the past few weeks, we have invited the heads of many government departments to brief you on China’s economic and social development.

Today, we have Mr. Guo Shuqing, who has just taken up his post as chairman of the China Banking Regulatory Commission (CBRC). He will explain how the banking industry is supporting supply-side structural reform, and then take your questions. We have also with us the two CBRC vice chairmen, Mr. Wang Zhaoxing and Cao Yu, and the CBRC chairman’s assistant, Mr. Yang Jiacai.

Guo Shuqing:

First, please allow me to make a general introduction of the banking industry’s reform, development and surveillance works. Later, I’ll take your questions.

In 2016, the banking industry completed all its tasks of the year and ensured a good beginning for the implementation of the 13th Five-Year Plan (2016-2020).

By the end of 2016, the Renminbi and foreign currency assets of Chinese banking sector reached 232.25 trillion yuan, up 15.8 percent year-on-year. The growth rate was 0.13 percentage points higher than the previous year. The balance of deposits and loans increased in a stable way. At the end of the year, the balance of Renminbi and foreign currency loans totaled 112.06 trillion yuan, increasing12.7 trillion yuan, or 12.79 percent, from the beginning of the year. The balance of Renminbi and foreign currency deposits was 155.52 trillion yuan, a gain of 15.74 trillion yuan, or 11.27 percent. Asset quality remained stable. The non-performing loan rate was 1.91 percent, down 0.02 percentage points on the year; net profits of the banking industry exceeded 2 trillion yuan. Regarding commercial banks, the non-performing loan rate was 1.74 percent, up 0.07 percentage points; net profits totaled 1.65 trillion yuan, up 3.54 percent; the average return on the asset and capital ratios remained basically unchanged, registered at 0.98 percent and 13.38 percent respectively. The banking industry is now better prepared to handle risk. The loan loss reserve, the non-performing loan provision coverage ratio, the non-performing loan provision ratio and the capital adequacy ratio of commercial banks remained basically unchanged at 2.67 trillion yuan, 176.4 percent, 3.08 percent and 13.28 percent respectively. Generally, the systemic risks of the banking sector remained under control.

This year, we will fully implement the guiding principles of the Central Economic Work Conference. Specifically, we will carry out four tasks.

First, we will be more active in supporting and implementing supply-side structural reform.

Regarding market-based debt-for-equity swaps, currently, the total value of such contracts has exceeded 430 billion yuan. The value of contracts implemented surpassed 40 billion yuan. In the next stage, we will increase policy support, enhance professional guidance and strengthen risk monitoring to promote further progress.

We will remain active but prudent in regard to the trial program to allow commercial banks to participate in combined debt-equity investments into startups and small businesses.Based on the special national conditions, we will explore new financial service modes for technological innovation companies. We will also support trial banks to diversify their service modes according to their internal conditions.

The banking sector will play a more active part in supporting supply-side structural reform of the agricultural sector. More loans will be given to rural areas, farmers and small and micro-sized enterprises. The efficiency of targeted poverty alleviation and financial inclusion will be improved. Weak links of financial services will be fixed.

Second, we will further improve service to real economy. We will continue to improve banking services and tackle the bureaucratic work style of some banks.

Third, we will take firm actions to stop illegal financial practices. According to the requirements of the Central Economic Work Conference, we will attach greater importance to risk control and prevent all kinds of systemic financial risks. Currently, cross-market financial products have become a major problem due to their complicated and unpredictable nature. The emergence of such products should be blamed on lack of an appropriate regulatory mechanism. Without a well-established mechanism, the banking industry will be exposed to grave risks. Therefore, we must review existing regulations, make new ones where necessary, revise outdated ones and abolish those that are deemed unsuitable.

Fourth, we will comprehensively improve banking personnel’s quality. One has to be very strong to strike iron. It’s the job for the banking industry to handle various risks, and it’s the CBRC’s duty to monitor management risk. We must increase the awareness of risks and always be ready to deal with worst-case scenarios. Only in this way can we fulfill our duty as a regulator.

That’s all I want to say. Thank you.

Hu Kaihong:

Thank you, Mr. Guo. Now, the floor is open to questions. Please identify your media outlet before raising questions.

Phoenix TV:

I have a question about mixed business regulations. We noted that recently the PBOC, together with the CBRC, the China Securities Regulatory Commission (CSRC) and the China Insurance Regulatory Commission (CIRC), is working on a guiding opinion about unified regulation. In your view, what is the biggest challenge in achieving this unified regulation? Is there any plan from the CBRC concerning the mixed regulations this year?

Guo Shuqing:

Your questions really hit the key point. “Shadow banking,” regulatory arbitrage, passageway business and lengthy supervision chain, all these issues have received much attention. At present, different financial institutions, such as commercial banks, trust companies, fund companies, securities companies and insurance companies, have carried out their own asset management activities, following different regulations and rules. This has resulted in disorders and made more capital flow to the virtual economy. So, we are working on a common regulation. I have to say I don’t know much about the progress, because this is my third day in office. As far as I am concerned, we will make a unified regulation based on the most basic standards. These standards should be achievable and observed by all parties concerned. On this basis, each institution and industry can implement their respective standards. In this way, we can increase the transparency of asset management products, curtail supervision chains and tighten supervision of shadow banking. Furthermore, we can reduce the amount of capital disguised in other forms and make it more transparent. I’d like to invite my colleague to explain further.

Cao Yu:

Asset management business, or wealth investment business, in the banking industry has played a positive role in such aspects as deepening financial market reform, promoting real economy growth, increasing citizens' property incomes and advancing transformation of banks. By the end of last year, the book balance of wealth investment funds reached 30 trillion yuan nationwide and such products generated revenue of 977.3 billion yuan.

The CBRC has paid much attention to wealth investment business. We will further improve the regulation formulation in this regard to strengthen supervision. The new regulation, which has attracted much concern, has been under revision for a long time. Based on existing regulations, we are working on a new management method targeting emerging problems so as to advance the transformation of wealth investment business in an orderly manner. The management method is almost mature. As for the supervision on big asset management business, the PBOC has joined hands with the CBRC, CSRC and CIRC to formulate a unified regulation on asset management products. It is going smoothly. The CBRC will actively cooperate with the PBOC and other agencies.

Reuters:

My question is also about risk. We have noted the rapid expansion of non-loan assets on bank balance sheets over the last five years, and particularly joint start-ups and city banks. In some cases, these non-loan assets surpass loan asset on bank balance sheets. How is the CBRC moving to control risks in the financial system? Can we expect the growth of these assets to diminish?

Guo Shuqing:

We’ll categorize them based on various conditions, drawing conclusions by taking into consideration the differences of banks and products. However, generally speaking, we follow the fundamental principle of scrutinizing those assets that appear on the balance sheet. I’ll ask my colleague to provide more details.

Wang Zhaoxing:

In recent years, in line with market-centered financial evolution, market- oriented reform of interest rates has progressed, and comprehensive development of banking businesses is underway. They have actually brought about two major changes: rapid growth of non-credit assets that, in fact, have come to outweigh credit assets and the expansion of off-balance sheet businesses that end up outperforming those on the balance sheet. They have emerged as a result of the increasing driving force coming from the market, as well as the deregulation of interest rates. There are also supervisory bodies attempting to decentralize banking risk by encouraging multiple bank assets and debts as well as diversified profit revenues.

Besides, the role of the market has been increasingly accentuated; this, entails the growth of bank extra-services and market-oriented and intermediary businesses. We treat them differently as they are not entirely negative compared to those involved in schemes shunning supervision, getting involved in arbitrage and circulating banking loans inside the financial system rather than handling them in the real economy.

Moreover, we in no way seek to oppose and interrupt the diverse developments of banks, yet we should be increasingly vigilant about possible risks. When doing so, we will first encourage further development of banking credit services either by loans or other approaches to ensure funds are dispensed in support of the real economy. Second, we’ll make sure risks are transparent and controllable. Third, we will secure the sufficiency of reserves and capital in a bid to offset potential dangers. As a result of China’s financial progress, market development and emergence of multiple banking services, those businesses cannot be simply described as right or wrong. However, at the same time, we will observe the issue from the three aspects I mentioned above to improve supervision and regulation. Thank you.

CCTV:

Just now, Mr. Guo mentioned that we need to improve the ability of financial services to serve the real economy. Since last year, a lot of debt committees have been established in China. The debt committees are aimed at solving the problems of zombie enterprises and overcapacity. Can you tell us the achievements of debt committees? Are there any further steps to be taken in reforming and innovating the system? Thanks.

Guo Shuqing:

Judging from my work experience, debt committees provide a good method. There are many banks providing loans to enterprises, especially to large and medium size enterprises. Therefore, unanimous action and deployment is welcomed by the local governments and the enterprises when it comes to the issues of enterprise structural adjustment and risk disposal. It is also beneficial for banks as it can prevent fear caused by information asymmetry. Currently, the debt committee is a good method for banks, enterprises, local governments and other stake holders to resolve problems, even serious problems, such as insolvency, bankruptcy liquidation and debt restructuring, because all parties have their resources and can negotiate together. The effect is much better in the process of dealing with zombie enterprises. We will continue to watch and determine future developments.

When I worked in Shandong, the debt committee played a great role in the process of structural adjustment and debt restructuring for a mineral group. More than 40 negotiations were held and a satisfied result was reached by all parties. Therefore, this is a good way to resolve debt issue as all parties can get the best protection for their rights.

Cao Yu:

Until the end of last year, there were 12, 836 debt committees established in China, involving a total credit amount of 14.85 trillion yuan. Through the debt committees, a win-win situation could be reached for banks and enterprises while reducing the negative influence on the daily operation of banks and enterprises brought by unilateral action. Thanks.

Bloomberg News:

My question is about debt-for-equity swaps. Will CBRC encourage more banks to participate? How to address the risk of private capital in participating? Isn’t it just prolonging the life of zombie companies and how can it be resolved? Thanks.

Guo Shuqing:

It has been highlighted that debt-for-equity swaps should follow market rules as well as the laws. Administrative orders and administrative negotiations are not allowed. Zombie enterprises are not allowed to participate in debt-for-equity swaps. We have carried out more than 40 billion yuan worth of swaps with more than 400 billion yuan in agreement. It is a sustainable method. The relevant laws and regulations will be improved during the process. However, our effort is helpful for structural reform on the supply side, especially for de-leveraging. It can also help enterprises get out of difficulties. Thanks.

21st Century Business Herald:

 I have two questions. First, there’s a rumor, Mr. Guo, that you will be in charge of the reform of the regulatory system, for example merger of CBRC, CSRC and CIRC. What can you say about this? Second, there has been a further increase of non-performing loans in the banking industry. What will CBRC do this year to address this issue? Thanks.

Guo Shuqing:

For the first question, the interpreter just now answered on behalf of me as he used the word “rumor” in his translation. As for the second one, it is quite normal to see volatility in non-performing loans at a time when the country’s economy has entered a “new normal” condition, economic growth slows down, economic restructuring intensifies and new economic growth drivers begin to emerge. Of course, the problem this time is worse than before. However, compared to other countries, a rate of 1.91 percent of non-performing loans in the entire banking sector, and 1.74 percent of non-performing loans for commercial banks are actually not too high. We have not included such aspects like overdue loans for more than 90 days and those on the “watch” list in our calculations. They won’t make a big difference to overall asset quality.

Ten years ago, China’s banking industry began equity division reform before getting listed on the stock market. After radical reform, we have established an internal risk control mechanism, a market-oriented management system, a constraint mechanism as well as an external supervision mechanism. These mechanisms are complete. Against the backdrop of a complicated domestic and international situation, there might be some problems, but they are quite understandable, and the overall situation is quite healthy. With strong leadership of the CPC Central Committee with Comrade Xi Jinping as the core, support from all walks of life, especially business circles, media supervision, the unremitting efforts of all banking sector staff and the conscientious devotion of the regulatory body, I’m convinced that any risks and problems can be properly solved. Thank you.

Caijing Magazine:

We know that actually the idea of a unified mix-business regulation framework has been floated for quite some time, and the People’s Bank of China has already set up a macro-potential regulation framework. So in your point of view, what is the most suitable model of regulation for the current development of the financial industry in China? And what kind of role will CBRC play in the future financial reform of the country? Thanks.

Guo Shuqing:

It’s very hard for me to answer your question since it’s only the third day for me to take this new appointment. I haven’t thought over this question yet because during the past four years, I have been working on the real economy. Last week, I was thinking about the industry transformation and upgrading in Shandong Province. For example, last year, 22 industrial transformation schemes have conducted mid-stage assessment; 23 schemes in the service industry are waiting for assessment this year; in agriculture, 46 kinds of products are ready to be assessed.

In 2016, we have completed 530,000 shantytown transformations; this year, 760,000 houses of shantytown transformation have been approved. In rural areas, we have to transform road, power, housing, toilet and other areas. Last year, we planned to transform 2 million toilets; but actually, we have finished 4.01 million. If you asked me what the most suitable model for toilet transformation is, I know it exactly; but if you asked me what the most suitable model of financial regulation is, I know nothing at present. I’m very sorry I can’t answer your question now. Thank you.

Dragon TV:

I have two questions. First is about real estate. Last year, the price of real estate in first- and second-tier cities grew extremely fast. Lots of prime lots appeared, most of which are reliant on bank loans. Mr. Guo, could you give us an introduction about how is the banking sector going to help alleviate the rising of house prices. And what will CBRC do to strengthen loan regulations coordinated with real estate control? Thanks.

Guo Shuqing:

Real estate finance is an important part. Currently, 1/4 of bank loans go to real estate market. Last year, 45 percent of new bank loans went to the real estate market. We are highly alert to a property-value bubble, and will do related research very seriously.

However, the most significant characteristic of the real estate market is the huge difference between different places. Different cities have to face different kinds of property bubble and risks. Therefore, in the financial regulation field, we hope banks will stand on actual reality and invest capital in real estate steadily and cautiously, including both towards individuals and property developers. Several years ago residents used to buy houses using their own deposit or by borrowing money from relatives and friends. In recent years, people like to rely on bank loans to buy houses. Last year, nearly half of the new bank loans were real estate loans, most of which are personal housing mortgage loans. Generally speaking, personal loans are not a huge proportion, and its leverage ratio is not high, but we have to pay close attention to the trend.

Wang Zhaoxing:

China’s real estate market is an emerging market featuring rapid growth, which made great contributions to Chinese economy, fiscal levies, as well as capital and profit growth of Chinese banks. As for real estate credit policy, we insist on a differentiated policy. We will limit those real estate loans containing bubbles and speculation, and destock some loans in third- and forth-tier cities. During the process of urbanization, housing demand especially rigid demand is also the loan demand which could improve people’s housing conditions and needs to be supported. By doing so, it will not only promote the real estate market to develop healthily and steadily, but also assure bank loans are safer.

Shanghai Securities News:

I have two questions. My first question is about the debt-to-equity swap. Is there a target, for example, to make its scale grow to a trillion yuan? In addition, with regards to setting up institutes, have you drawn up some preconditions, or is the CBRC drafting specific regulations? Since the investment-loan linkage and the debt-to-equity are being promoted, will you revise the relevant articles on limiting investment from banks in the Law on Commercial Banks?

My second question is about illegal fundraising. Ezubao and the Fanya Metal Exchange in Kunming drew much public concern, mainly because the incidents happened without prior warning with blurred boundaries in terms of their legality. Did the CBRC ever consider how to solve this problem from an institutional perspective? The CBRC said in the past that it planned to hasten the unveiling of regulations on dealing with illegal fundraising. How is this progressing?

Guo Shuqing:

We answered your first question just now. There’s no preset target. The more than 400 billion yuan (US$) we mentioned was merely the face value of the deals we signed. The swap hasn't been fully completed. We will conduct detailed research about the accommodating regulations and will make them based on laws before piloting them. As for your question concerning illegal fundraising, Yang Jiacai will answer this question.

Yang Jiacai:

The question on illegal fundraising you asked just now did receive much public attention, since it was one of the diehard problems in China's economic and social development. The issue exposes every several years, especially when the economy goes downward. In the past two years, illegal fundraising was flagrant, causing serious harm. However, it's indeed difficult to spot such activities at an early stage. How we could identify them at an early stage when they haven't become full-fledged is a focus of our research.

Entrusted by the State Council, the CBRC heads the national inter-ministerial joint meeting on combating illegal fundraising. Dealing with illegal fundraising isn't the CBRC's statutory duty; we and other members of the joint meeting have come up with many measures.

Illegal fundraising is a process in which love becomes hatred, and the dallied becomes the forsaken. In the preliminary stage, people are bound by common interests, so that few will disclose it, although local governments all encourage such disclosure with incentives. But we didn't see many disclosures. Why? Because they share common interests from the beginning.

We are currently drafting an administrative act, the Regulation on Dealing with Illegal Fundraising. This regulation was drafted by members of the joint meeting and has taken into consideration opinions from all provincial governments as well as from all ministries. We submitted the draft to the Legislative Affairs Office of the State Council last July, which in turn, conducted in-depth research while extensively collecting the opinions of ministries and local governments. The regulation is now being perfected by the Legislative Affairs Office, which is actively seeking its promulgation.

Second, who will be the enforcement agency? Now there's no authorized law enforcement institution for the cracking down on illegal fundraising, so we need such an administrative law enforcement department. Currently, local governments’ handling of illegal fundraising is usually a responsibility by local financial offices.

The office was called the Bureau of Financial Supervision when Guo Shuqing was working in Shandong. Such an agency existed at all levels of government. In each city, there was a vice mayor especially in charge of financial affairs. Therefore, there was fewer illegal fundraising in Shandong than elsewhere.

Another issue is that we should make clear the legal liabilities of the people involved in illegal fundraising. Usually, illegal fundraising involve three subjects, namely, the initiators, the assistants and the participants. It's important to make clear what liabilities these three subjects will take.

For example, if we disclose a cheater and warn you off him, you ignore the warning. In the end, when you break up, you start to call yourself a victim and want to find trouble with the government. This may not make sense. Moreover, we will make clear and standardize the procedure, methods and approaches. The regulation, when it is promulgated, will be of great help in dealing with illegal fundraising. Thank you.

Wang Zhaoxing:

With regards to the debt-to-equity swap, this time it features no set requirement with regard to its scale, goal or progress. Parties involved will take fully independent ways to carry this out, like dating and marriage – completely independent, self-governing and free. The government won’t interfere in the issue, just as there is no arranged marriage.

Guo Shuqing:

Not even a match-making agency.

Wang Zhaoxing: This is a reorganization plan formed by all parties based on negotiation for the best or at least better results.

People's Daily Online:

Last week, the CBRC issued the Guidelines for the Depository Business of Peer-to-Peer Lending Funds, which has drawn widespread attention in the industry. In recent years, supervision of the new internet finance industry has become more and more specific. Could you give us a brief introduction to the next steps of CBRC's supervisory direction and focus? I have another question. Mr. Guo, will you attempt to register or experience an internet finance business in the future, or have you already had such experiences?

Guo Shuqing:

I will answer your second question first while leaving your first one for Mr. Cao. I have never tried internet finance before, and whether I will try it or not in the future depends on circumstances. But, my family members are very familiar with this business and they have tried in this field many times. I think online shopping and new means of payment, such as Yu'E Bao payment, mobile payment, and Quick Response code scanning, are really very helpful to the real economy, but we must guard against the risks resulting from them.

Cao Yu:

It should be said that the essence of internet finance is still finance, and the rules which internet finance abides by are still financial rules.The Guiding Opinions on Promoting the Healthy Development of Internet Finance, issued by 10 ministerial departments including the People's Bank of China in 2015, has clearly stipulated CBRC's responsibility in supervising peer-to-peer (P2P) online lending services. It should be said that, our current supervisory system framework for the P2P online lending service has basically been completed.

Caixin.com:

How would you solve the problems related to Hengfeng Bank's violations of laws and regulations, which have been exposed by a number of media outlets, and other such similar kind of problems? Thank you.

Guo Shuqing:

Speaking of this question, I think it has some relationship with me because I served as governor of Shandong Province where Hengfeng Bank is based. But the relationship is not too close, because the bank is in Yantai City's jurisdiction.The bank's stock ownership is composed of state-owned shares and other dispersed shares, and it is directly supervised by CBRC. Mr. Cao knows well about it, so I would like to invite him to further answer this question.

Cao Yu:

The problems reflected in the public opinions are being checked and tackled by CBRC in conjunction with the Shandong provincial government. If there are any illegal acts to be found, the parties concerned will be severely punished in accordance with the law. Presently, the business in Hengfeng Bank is proceeding stably and orderly.

Guo Shuqing:

I have one point to add. Currently, Hengfeng bank is conducting the shareholding system reform which is aimed at further standardizing and rationalizing all its internal and external structures and relations. As soon as conditions are right, it will be pushed to the capital market for public listing.

China Securities News:

Last year, the investment-lending linkage pilot program was launched. What has been the progress of the pilot program? Is there any plan to approve additional institutions on this program? The second question is about private banks. The private bank program was also launched last year. So far, according to the statistics released by CBRC, the program was running pretty well. This year, some private capital and listed companies have again expressed a desire to set up private banks. So what will be the trend of private bank development this year? Thank you.

Guo Shuqing:

The investment-lending linkage pilot program is in the trial and exploration stage. We should be positive and prudential with regards to the program. So far, there is no detailed plan for it, but a bank has done their capital landing, and they are boosting their progress. I noticed a question from the list, asking if there is no such program in the United States and European countries, or if it is not a mainstream practice and so can it work in China? In my opinion, it is not a major problem. China can have something that the United States doesn't have, such as spicy hotpot. But what we have to pay attention to is the possibility that linking investment and lending will bring more risks, so it's better to combine it with innovation in science and technology.

For the second question, it is a good thing that private capital enters the financial market, and it is necessary for China's economic development. It's especially necessary for the areas that the financial service doesn't cover or fully cover and that have inadequate competition. But there is also a big risk that we have to take notice of. We must adopt some measures to prevent a minority of people or capital from controlling the bank and turning it into a cash machine for connected transactions. Taking public deposits for their own investment will no doubt bring high risks, which may result in serious consequences. We have to prevent this from happening.

Wang Zhaoxing:

We all know that China's current financial pattern is dominated by bank-led indirect finance, which accounts for 90 percent of all indirect finance. Most of the banks are traditional banks, which specialize in traditional credit operations, including liquidity loans and fixed asset loans. They are not familiar with risk identification, judgment, measurement and management on high-tech innovative enterprises, which is a big challenge for banks. Meanwhile, these enterprises feature light assets, with high uncertainties and risks, without any tangible assets for mortgage, so they have also encountered many difficulties in financing.

With this background, we initiated the investment-lending linkage pilot program, making equity investments for start-ups and growing enterprises and supporting them with bank loans later to establish a complete supporting chain. As a brand new exploration, the program also means a lot of risks and challenges for traditional banks. So we encourage pilot projects.

We have selected five cities for pilot projects, including Shanghai, Beijing, Tianjin, Xi'an and Wuhan. A total of 10 banks are involved. In addition to setting up new institutions, we are also preparing negotiations with technology enterprises that may receive equity investments in the future. A project database will be built. Once the subsidiary companies are approved by the State Council, the project will be on the fast track.

Cao Yu:

Now, I’ll briefly introduce our work on private banks. A pilot program on private banks was carried out in 2014 during which we approved five such banks. In 2015, we made systemic preparations and improved various rules. By 2016, we saw normalized and regular operation of private banks. Therefore, we approved the establishment of 12 more last year, three of which have already started business. The operation of private banks last year was generally smooth. By year-end, the total assets of the existing eight private banks reached 180 billion yuan, and their outstanding loans stood at about 80 billion yuan. These banks have already begun serving the needs of society and the overall economy, and the legal and orderly operation of private banks has been achieved. Thank you.

Guo Shuqing:

Thank you all for your attendance, today. You are always welcome to offer your advice and suggestions on our work.

Hu Kaihong:

Today’s press conference ends here. Thank you every one.

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